Precious metals such as gold, silver and platinum have been considered valuable since the beginning of time. In modern times precious metals often play an integral role in the portfolio of many investors. If investing in precious metals is something that interests you but you know little about it then you may wonder which one is best for those who invest? You may also wonder why precious metals have so much volatility? Here we explore how investing in precious metals works and why you should decide to go for the gold! Read on.
A Golden Opportunity
The expression “All that glitters is not gold” does not fit in terms of investing in gold. Gold is the most sought after and indeed the precious metal that takes top honors. There are many reasons for this. Gold is very durable as it does not rust nor does it corrode. It is also malleable and has the ability to conduct electricity and heat. It is also versatile in that it can be used in electronic as well as dental applications. The principal uses of gold however are as a type of currency as well as a base for many pieces of jewelry, from rings to necklaces to earrings to bracelets.
The value given to gold is determined by what is happening in the financial markets, on a 24/7 basis. The price of gold is not as affected by the laws that govern supply and demand as much as other types of precious metals. Sentiment plays a role here. The reason for this is primarily because new mine supply is greatly outweighed by the size of the above-ground gold that is hoarded. To put it a slightly different way, when the gold hoarders decide that they want to sell then the price of gold drops. When they want to buy gold the new supply of the precious metal is absorbed at a rapid rate and the prices of gold go up.
There are a variety of factors that can cause an increase in the desire to hoard gold. These factors include systemic financial concerns, inflation and political crises or war. Let us look at those now.
When financial institutions and the money they have are perceived as being unstable then gold is often sought out as safe in terms of its store of value. The same can be said if the stability of a government is in question. This therefore constitutes systemic financial concerns.
Inflation is another factor that makes a difference. When the real rates of return are negative in the real estate markets or in terms of bonds or equities then individuals look to gold as an asset that will continue to be valuable.
Any type of political crisis or upheaval and/or war cause people to hoard gold like crazy. This is because gold can make a lifetime worth of savings as portable as possible and can then be stored until the point at which it can be traded for food, shelter or a safe voyage to a destination that is out of danger’s way.
The Attributes of Silver
Let us turn our attention now to another precious metal, that of silver. Unlike gold the price of silver tends to swing back and forth from being perceived as a store of value to playing a significant role for its use as an industrial metal. This explains why the fluctuations in the price of silver are more volatile than the price fluctuations for gold.
While silver can be hoarded every bit as much as gold due to the investment demand, the industrial supply and demand for it has a tremendous impact on its price. The supply/demand equation in this case fluctuates with its share of new innovations.
These innovations are many. For example, silver once played a very essential role in the world of photography. Silver-based photographic film was dominant until the digital camera came on the scene and changed that. The rise of the vast middle class in terms of the emerging market economies of the East created a very high demand for everything from medical products to electrical appliances to any type of industrial item that contains parts made of silver. Silver is very versatile and is used for everything from electrical connections to bearings. The properties of silver make it a commodity that is in much demand. Silver is used in microcircuit markets, superconductor applications and batteries. These new innovations have caused silver to be more and more desired.
At the present time it is unclear as to whether these developments in various industries will affect the non-investment demand for silver overall, and to what extent it will affect it. What is known at the present time is that the price of silver is impacted by the applications it is used for. Silver is therefore not just used to make jewelry or as a store of value.
Get Ready to Go Platinum!
In much the same way as the other precious metals described here- gold and silver- platinum is traded nonstop, 24/7 on global commodities markets. During routine periods when the market is stable, as well as when there is political stability, platinum tends to get traded for a higher price because it is much less rare. As well a smaller proportion of the metal is mined on a yearly basis.
There are other factors that come into play when it comes to determining the price of platinum. In fact all of these factors are the reason why platinum is the most volatile of all of the precious metals. For example, platinum in much the same way as silver is an industrial metal. The largest demand for this metal is automotive catalysts. These are used to reduce the dangers that come from emissions. Jewelry would be the second industry that has the greatest demand for platinum. It is also readily used for petroleum and chemical refining catalysts as well as the computer industry.
Due to the fact that the automobile industry relies so heavily on platinum the prices are therefore determined in large part by production numbers and auto sales. Legislation that relates to “clean air” could make it such that companies that make automobiles are required to install more catalytic converters. This would then increase the need for platinum in this industry. However in 2009 both American as well as Japanese automobile companies were beginning to use recycled auto catalysts and/or use more of platinum’s sister group metal palladium, which is very reliable and less expensive than platinum.
The majority of mines for platinum are heavily concentrated in two countries in particular. These include Russia and South Africa. This lends itself to a greater potential for cartel-like action that supports the price of platinum as well as artificially raises it.
Investing in Precious Metals
So what options do you have when it comes to investing in precious metals? Let’s take a look at what your portfolio could be made up of in this area.
Commodity exchange traded funds (ETFs) are available for gold, silver and platinum. As of 2009 to access a commodity ETF for platinum you must be able to trade on the London Stock Exchange (LSE). Exchange traded funds are both liquid and convenient in terms of buying and selling any of the three precious metals.
Common stocks and mutual funds are other options worth looking into. Shares of precious metal miners are leveraged to price movements in terms of precious metals. Be aware however that unless you are knowledgeable of how mining stocks are valued it may be smarter and in your best interests to stick to funds that have managers that come with solid performance records.
Both the futures as well as the options markets allow for both leverage and liquidity to those investors who wish to make big bets on precious metals. The greatest potential for both profits (and unfortunately also losses) can be found with derivative products.
Bullion is yet another viable option for you. If you do not have a place to put coins and bars then you are better off looking to something else. If you tend to expect the worst then bullion should be the option you choose. However if you are an investor with a time horizon then bullion is illiquid and is a pain to hold. Pass it up in this case.
Certificates provide investors with all of the benefits that come with owning gold in its physical form but without the hassle of transporting and storing it. Certificates are just paper at the end of the day however and do not provide any real type of insurance. You cannot exchange them for anything of true value.
Precious Metals and You
Precious metals offer a type of unique and special protection from inflation. They also have intrinsic value and can provide just the type of insurance you are looking for. They also provide to every investor both a beneficial as well as an effective means of diversifying a portfolio. Regardless of whether you choose gold, silver, platinum (or a combination of these) you will not be disappointed in your investment choices.